Helping Americans Get Better Loans

The US is almost the only country in the world where homebuyers can get 30-year fixed home loans. Seriously.

In Canada, for instance, the longest term for a fixed loan is five years. The payment may be calculated based on a 25-year repayment, but your rate is only guaranteed for up to five years, and after that you have to refinance at the current rate.

Fannie Mae and Freddie Mac are two big reasons we have 30-year fixed home loans in the US. They create a market for mortgages in the US, so lenders don’t tie up their money for three decades when they make mortgages.

Instead, they can sell the loans they make to investors, and then take that money and make more loans.

The two GSEs repackage the loans they buy into mortgage-backed securities, or MBS. MBS are sold like shares of stock to investors. Fannie and Freddie also keep some loans on their own books.

If a borrower defaults on a mortgage, the investors still get paid by the GSE. That guarantee means investors take on less risk and require a lower return — which reduces the rate paid by you, the borrower.

The loan guarantee also gives the GSEs the power to establish regulations and loan guidelines, so that lenders are less likely to approve unsafe mortgages.

For consumers, all of this is pretty much behind-the-scenes. The direct impact on borrowers comes in the form of program guidelines established by the federal government, and in the lower rates and increased availability of fixed-rate mortgages.

Similarities

Fannie Mae and Freddie Mac loans are also called conforming loans, because they must conform to guidelines established by the federal government.

The loan limits are the same for both GSEs. That’s currently $453,100 in most markets, but higher in areas with high-cost housing.

In general, conforming loans limit your debt-to-income (DTI) ratio to 45 percent. (DTI compares your gross monthly income with your minimum payments on all debts including your housing expense.) However, you can get a loan with a DTI as high as 50 percent if you are otherwise a perfect borrower.

When you apply for a conforming loan, keep in mind that your lender may have overlays. Overlays are tougher standards than those established by the GSEs. This means that even if you meet those minimum requirements, you are not guaranteed loan approval.

Both Fannie Mae and Freddie Mac offer fixed-rate and adjustable-rate mortgages (ARMs) with different loan terms. They offer financing for condominiums and single-family homes, and they finance primary residences, second homes and investment properties.

Both provide loans for purchasing, renovating and refinancing a home. They require private mortgage insurance if you make a down payment of less than 20 percent.

Differences

There are some differences between some Fannie Mae and Freddie Mac programs.

Both offer low down payment options. Fannie Mae programs include the HomeReady loan and the Standard 97 percent loan. Each requires as little as three percent down.

The HomeReady loan from Fannie Mae limits borrower income to a maximum 80 percent of area median income. The standard program doesn’t have an income limitation.

Freddie Mac’s comparable program is the Home Possible loan. It’s limited to borrowers with a maximum of 100 percent of area median income, or those who purchase in “underserved” areas.

Home Possible guidelines require that all borrowers must live on the property. Fannie Mae’s similar program requires all borrowers to reside in the home only if the down payment is less than five percent.

Fannie Mae requires different minimum down payments (or home equity, in the case of refinance)f or fixed-rate loans and ARMs. You can buy a home with a three percent down payment and a fixed-rate purchase loan. But you’ll need at least ten percent if you choose an ARM.

If you’re interested in a cash-out refinance, both agencies require 20 percent in home equity for your primary residence, but if you want to use an ARM for the transaction, Fannie Mae requires 25 percent home equity.

The best way to find out which loan program is the right fit for your financial needs is to consult a lender.

What Are Today’s Mortgage Rates?

Today’s mortgage rates may depend on whether you use a Freddie Mac or Fannie Mae lender because their programs and pricing may differ slightly. The best way to find the lowest interest rate is to simply get quotes from several competing mortgage lenders.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.